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Zynga (ZNGA) is a leading provider of social game services with 240M average monthly active users over 175 countries. All of ZNGA's games are free to play, and it generates revenue through the in-game sale of virtual goods and advertising. With Facebook (FB) being a key partner, more than 90% of bookings and revenue result from users playing games within Facebook.

On Friday, ZNGA was trading at $2.33 with 17.23% decline and was trading in the range of $2.21 - $2.36 at the time of writing. 87.42M shares were already traded as compared to the 30-day average of 13.40M. Today's big decline was mainly caused by the following three announcements, as reported by Matt Doiron from Insider Monkey: 1) write-down of the acquisition of OMGPop with the estimate of $90M; 2) the expectation that the Q3 2012 EPS would be in the range of zero to a loss of one cent (excluding the OMGPop charge); 3) the "bookings" for the full year were cut by $100M. The share price of ZNGA was further under pressure when Baird downgraded it to neutral, citing concerns over the "magnitude" of the forecast cut, as reported by Benjamin Pimentel from MarketWatch.

Just as we thought ZNGA could not get any worse, today's announcements further kicked down ZNGA's stock and decreased its market cap to $1.77B with P/B ratio of 1.15. From a balance sheet perspective, current price of $2.33 is already lower than the last reported book value per share of $2.46, where the total cash per share was $1.60. For a speculative growth company in the technology sector, ZNGA definitely failed to convince its investors that it can grow. However, for those investors and traders who are still stuck with ZNGA, it becomes a game of probability, psychology and game theory. Sounds familiar? It is exactly what the poker game is based on. Ironically, Zynga Poker is Zynga's very first game and the world's largest free-to-play online poker game, which Zynga is betting on now with online gambling. As of now, Zynga's traders and investors are all in this game of poker, where money is placed into the pot voluntarily by the player who, at least in theory, rationally believes the bet has positive expected value. There may be nothing special about this poker game, except there is currently $1.77B at stake.

With my love for poker games and as an option trader, I am joining the game this time based on four points: 1) cash is as good as cash, and ZNGA should find its support at its current cash level; 2) volatility will always be there, as fear and hope will always exist in the capital market and the game will not stop until everyone leaves; 3) with Zynga's strong tie with Facebook and its huge user base, Zynga still has edge over other social game developers and its position may become more defensible if it can become a platform for distributing third-party games; 4) Mark Pincus. While Mark Pincus is a very controversial CEO and is being blamed for the mismanagement and the falling stock price, I see Mark Pincus as a person with vision and determination. I see Mark Pincus as a wild card in this Zynga poker game and everything is still possible.

Right now, I am betting with the following option play: buy 1x Jan, 2013 $2 call and short 2x Jan, 2013 $2 put, where $0.36 credit will be received for the short put and the cost of $0.53 will be spent for the call, which result in the net debit of $0.17. The profit potential is unlimited and the maximum risk is 2x ZNGA cost at $2.17, which gives us an edge of 6.87% as compared to the current price of $2.33.

Note: The author had no intention of encouraging or supporting bullish view for Zynga, instead, the purpose of this article is to share how the author joined this Zynga game as an option trader.

Source: Zynga - The Largest Poker Game For Traders